This is because it uses the picture that is in the notification. This picture is low resolution on the phone, hence it is low resolution on the watch.
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Galaxy S5, Galaxy Note 8.0
Previously owned - HTC One M8, Galaxy S4, Sony Xperia Z, Nexus 7, Galaxy S3 Pebble Blue and White, Asus Transformer Prime, Galaxy Note, Galaxy Nexus, Galaxy Tab 10.1, HTC Desire S, Galaxy S2, Galaxy S, Motorola XPRT, Motorola Xoom, HTC Desire Z, HTC Desire, Motorola Milestone, Nexus One, HTC Hero, HTC Touch Pro 2, HTC Athena, HTC Touch Pro, HTC Universal (that's all I can think of for now...)