https://wccftech.com/ios-14-7-prevents-iphones-with-touch-id-to-unlock-apple-watch-apple-has-acknowledged-this-issue/

After updating to iOS 14.7, many users with a Touch ID iPhone have noticed that they cannot unlock their Apple Watch. Apple knows it's a very real issue and is promising a fix.

However, you can use the passcode feature to unlock the Apple Watch still, which is not convenient for a lot of us out there. See, when you take the Apple Watch off your wrist, it locks up so that no one can snoop in on your information or make any sort of payment with it. To unlock it, simply put it on your wrist, type in the passcode, or just unlock your iPhone using Face ID or Touch ID.