In later versions of Unix, Ken Thompson would most certainly have been able to use upper-case characters but it's unclear whether he would have wanted to. It's not that Unix itself prevented it, but rather that there were still plenty of terminals at that time that supported only the 64-character ASCII character set, which were upper-case only.
The "7th Edition UNIX - Summary" document found in the 7th edition programmer's manual (volume 2) listed the hardware requirements for v7 Unix and stated that "full duplex 96- character ASCII terminals" were "strongly recommended" (i.e., not "required").
Similarly, in "UNIX For Beginners - Second Edition" (Kernighan, 1978) it's stated:
But note: UNIX is strongly oriented towards devices with lower case.
If your terminal produces only upper case (e.g., model 33 Teletype,
some video and portable terminals), life will be so difficult that you
should look for another terminal.
Unix was able to deal with such terminals by converting upper-case to lower-case, effectively turning that terminal into a lower-case-only device, so that Unix interpreted everything as lower-case, even if the user was seeing it in upper-case. It was possible in these situations to tell Unix to treat certain characters as upper-case by using a special escape sequence (namely, a backslash), but it was a nuisance.
Given the strong possibility that Ken Thompson might find himself logging on to a Unix system on, say, a Teletype Model 33, it would have made sense for him to avoid upper-case characters in his own password, simply to avoid the nuisance of using escape sequences.
Note that in very early versions of Unix (e.g. 1st through 3rd editions) the console Teletype was always mapped to lower-case (i.e. it was not possible to type upper-case characters at the console), and given that Ken Thompson would have been one of the people likely to use the console typewriter, there would have been a technical obstacle preventing him from using upper-case characters in his password, at least in those early versions.