Apple Watch and iphone

When you pull up the Apple Watch control panel from the bottom edge of the screen,

• if the Apple Watch has a green cell phone, it is using Bluetooth and talking to the Apple Watch using the Apple Watch for all radio services.
• if the Apple Watch has a green WiFi icon, it is using WiFi
• if the Apple Watch has the cellular icon it is using cellular

The iPhone connects to the internet any way it wants. It can connect via WiFi or it can connect via is cellular radio. Generally if WiFi is available and the iPhone can connect and is authorized, then the iPhone will use WiFi. If WiFi is not available, then cellular is used.

The Apple Watch will always try for a Low Energy Bluetooth connection to the iPhone. If it cannot use Bluetooth, it will try for WiFi if the Apple Watch has WiFi available, it can connect, and is authorized.

A Cellular Apple Watch will use its cellular radio for some services back to the iPhone, such as SMS/MMS texting, but for the most part if the Apple Watch has to use its cellular radio, it does not talk to the iPhone.

But even a cellular Apple Watch will use Bluetooth if it can to take advantage of the iPhones better battery, better radios, better antenna.