How to free space from my Apple Watch
It says that I have to free space in my Apple Watch in order to install the update
iPhone 11, iOS 14
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Unpair your Apple Watch via the Watch app on your iPhone.
Then Re-pair your Apple Watch again,this usually frees up
enough storage space to update your watch.And without any loss of data.
Or this;
If you don’t have enough space to update your Apple Watch – Apple Support