Issue is resolved and the app is working on the watch.
Restarted iPhone and Watch - app still did not work. Waited around 1/2 an hour and tried it again and now it works. No other settings were changed - just a bit of a lag in enabling the app on the watch - weird.
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same issue with MBP M1. It asks for the computer password 2 times to install (usually it is only once) and then it fails. Multiple reboots and still the same issue.