That's an opinion. It's free, download it and try it out.

- Classic DF controls are different from "modern standards", but to say that they are "terrible" is a personal opinion - even if it's shared by many. I myself prefer the classic DF controls (which is also a personal opinion).
- That classic Daggerfall can't handle diagonal movement is simply not true. For example, you can use the keys for forward / backward movement together with the keys for turning (or sliding) left / right to move in all directions, and it's not difficult or clumsy at all.
- DFU is NOT trying to fully match classic. The best example is the movement I mentioned above, which can't be done in DFU while still being able to use the cursor at the same time. As soon as you activate the cursor in DFU, you can't turn anymore. You may say you don't need it, because you can do everything with keystrokes, too, but it's not classic DF.
Classic DF supported two parallel operation modes (mouse-look and no mouse-look), and players could freely switch between the two. This is no longer fully possible in DFU.

Yes, I should have mentionned it's my opinion. Objectively, being the default also prevented many new players from really trying Daggerfall, and it's terrible in that sense.

I also tried diagonals; Forward and turning works, forward and sliding didn't, but maybe that depends on keyboard wiring or choice of keys, or maybe it's a DOSBox limitation.

Maybe DFU will try to emulate this a bit better, say be able to turn while in cursor mode, for the sake of completeness.

Nothing against opinions, and you don't always have to add that it's an opinion when its obvious (as in your case). I made a point of it mainly because I felt the qualification "terrible" (which I addept as personal opinion) is not appropriate and unfair, and it's not shared by everyone (though by the majority, I'm afraid) - view this in conjunction with the error to say that diagonal movement is not possible in classic DF.
It looks like you can't combine sliding with anything in classic DF (I thought I had managed it earlier, but when I tried it again right now it didn't work indeed). But forward/backward+turning does work.
Regarding the third point, someone else pointed out that it's a deliberate design decision of the DFU makers, and unlikely to change. I found a partial workaround, which is not as good as classic DF, but which I can live with (I do like to play DFU, by the way).