I don't know why the launcher settings aren't getting saved, but I can imagine Steam somehow obstructs this.
In any case, the resolutions of Morrowind are set in its registry entry — not in an .ini file — so changing it is a bit harder than editing a straightforward(ish) text file.
Still, the steps are provided here:
You can also set any custom resolution by hand: (Note that Morrowind must be fully launched at least one time for these registry settings to be viewable)
Press Windows+R on keyboard, then type regedit in the box that opens.
Locate the key HKEY_LOCAL_MACHINE\SOFTWARE\Bethesda Softworks\Morrowind (for 64-bit Windows system, locate HKEY_CURRENT_USER\SOFTWARE\Wow6432Node\Bethesda Softworks\Morrowind).
On the right pane, you will see several numerical values. Double-click on "Screen Height" and "Screen Width", and set them to values you wish to use (e.g. 1050 and 1400, respectively).
In Windows 7 64-bit, these same registry values can be found at HKEY_CLASSES_ROOT\VirtualStore\MACHINE\SOFTWARE\Wow6432Node\Bethesda Softworks\Morrowind.
Do note that without any third-party mods or plugins the game will only allow for 4:3 aspect ratios.
To circumvent that limitation, and make the entire process easier, there are some plugins that give you a graphic interface to tweak these and many more settings:
Also, take a look at this post and this guide. The first one is for general optimizations, the second to overhaul and mod the graphics. It's unrelated to the question, but might dramatically improve your experience.