I just did this on my '89 and yes I think you do have to remove it at the transmission. Don't forget to slip it out from behind that clip under the carpet behind the brake pedal too.
Without those disconnects, I think you could stress the cable and possibly kink it. There is also a plastic holder for the cable under the car that should be disconnected in order for the cable to move freely.
I would also recommend you take your time pushing the cluster back in when finished. Push a little, then pull the cable a bit down in the footwell to keep it from kinking behing the cluster.
This isn't necessary in the W123's but in the W124's I think MB saved some money by using a shorter clable....
Yes I did this on my '84 as well.
1995 E320 - 115kmi+ Smoke Silver/Cream (Wife's Wagon)
1989 260E - 195kmi+ Black/Grey (My Panther)
1984 300D - 242kmi+ Black/Palomino (Retired)