The Apple Watch app seems to be exclusive to iPhones only. So even if you have an iPod touch 7, you won't be able to connect it to an Apple Watch, because the app that pairs an Apple Watch to an iOS device is not present on the iPod touch.
That's correct. The only way to connect an Apple Watch (even a cellular model) is to have an iPhone. The Apple Watch app is not available on iPod touch or iPad devices, and it cannot pair with Android devices at all either.
If you have an Apple Watch and plan on using it, then yes, because an iPhone is required to get it set up, even if you have the cellular version.
There are also plenty of other benefits of using an iPhone over an iPod touch. The iPhone XS has a 5.8-inch Super Retina HD OLED Display (XS Max has 6.5-inches of screen), which is much more vibrant and has a higher resolution than the 4-inch Retina display of the iPod touch 7. There are also better cameras (dual 12MP versus 8MP for rear, 7MP versus 1.2MP for front) with Portrait Mode and Lighting. The iPhone XR even has a 6.1-inch Liquid Retina display, which is also better than the iPod touch 7.
Plus, with an iPhone, you'll be able to stay connected wherever you are due to a cellular data plan, versus the iPod touch that can only connect via Wi-Fi. The iPhone XS and XS Max also go up to 512GB in storage, meaning you'll be able to have a lot more music and media with you compared to the iPod touch 7, which only goes up to 256GB.
However, if you just want a device for listening to music only, view some videos and photos, and even play some games, then the iPod touch 7 is a good device. Keep in mind that it won't connect to an Apple Watch and only goes up to 256GB in capacity.