the 169.x.x.x address is the clue. this says that you could not access the router's DHCP
service and the NIC generated that address.
You should have used the Win/7 Network Wizard to create the connection and chosen
the Private networking option. This would configure the Firewall properly.
If all else fails, you can add FW rules like this:allow tcp/upd in/out srcip=any destip=any ports 67-68
The actual syntax for win/7 should be easily derived,
but the above is a generic statement of the rule.