Back-to-back league wins over Middlesbrough and West Bromwich Albion had helped move Palace out of the bottom three and Sam Allardyce's men continued their revival at Selhurst Park, albeit with a little helping hand from Deeney.
Palace had appeared the more dangerous side in a match between two evenly matched teams with Wilfried Zaha looking particularly threatening for the Eagles.
And they got their reward when Deeney, who earned a 1-1 draw for Watford in the reverse fixture on Boxing Day, headed past Heurelho Gomes when attempting a clearance in the 68th minute.
The result leaves Palace two places and four points clear of Hull City, who are 18th, with a game in hand, while Watford may still be throwing nervous glances at the bottom three, albeit they have a seven-point buffer with 10 games to go.
Palace made an encouraging start to the game and Zaha felt he should have been awarded a penalty after a challenge from Craig Cathcart, while Mamadou Sakho headed over from a corner shortly after.
Yohan Cabaye was next to threaten for the Eagles after more good work from Zaha down the left, but he was unfortunate to see his shot hit the leg of a Watford defender as it bounced wide for a corner.
Watford, meanwhile, struggled to create any chances of note, with M'Baye Niang's opportunistic long-range strike straight at goalkeeper Wayne Hennessey and Valon Behrami's wayward volley their only attempts before the break.
The visitors improved somewhat after half-time and Etienne Capoue tried his luck early on, blasting a shot over the bar from a dangerous position just outside the box.
Palace remained the more dangerous team, though, and they came close to opening the scoring when Zaha fired just over from a narrow angle after being set up by Andros Townsend.
But Palace did make the breakthrough with just over 20 minutes to play. Cabaye whipped a free-kick in from the left and Deeney's header beat Gomes at the near post, the ball striking the upright on its way home.
Christian Benteke should perhaps have put the match to bed in the closing stages of the game, but his miss would matter little in the end as Palace saw out the game to take the three points.
Key Opta stats:
- Crystal Palace are only the fourth team since 2003-2004 to win a Premier League game without directing a single shot on target.
- Watford have failed to find the back of the net in five of their last seven top-flight games on the road.
- Only Sunderland (22) have failed to score a first-half goal in more Premier League games this season than Crystal Palace (21, level with Hull).