Is the data stored on the Apple Watch encrypted?
You can set the PIN code and automatic wipe of data on the watch. Does that mean that encryption is used to protect the data stored on the phone?
Apple Watch
Contrary to your post's title, your actual post asks if the iPhone data is encrypted, not if the Apple Watch is encrypted.
See page 44 of the iPhone User Guide for iOS 8.4. Setting a passcode on the iPhone turns on data protection on the iPhone.