Deeney finally got the better of Jack Butland with a free header in the 38th minute after the England goalkeeper, back on loan with City following his deadline-day move to Stoke, had denied the visitors with a couple of fine saves.
Butland could have done better with Watford's second on the stroke of half-time having failed to keep out man-of-the-match Ikechi Anya, although it was no more than the lively winger and the Hornets deserved following an impressive and intricate attacking display.
A well-worked counter-attack saw Anya claim his second assist of the afternoon as he set up Deeney shortly after the hour mark, before Almen Abdi fired home a fourth late on, with the Hertfordshire side further strengthening their position as top goalscorers in the Championship.
Birmingham, however, were booed off the pitch at full-time and saw their recent resurgence clinically ended to remain in a relegation scrap.
The game's first real chance came after 22 minutes but Deeney could only head wide Abdi's corner from six yards.
Matej Vydra's neat turn and half-volley was gathered well by Butland at the second attempt before the City goalkeeper superbly saved with his legs from Abdi.
Butland was again called into action to routinely collect Vydra's free-kick although Blues were probing well at the other end, with Chris Burke particularly lively.
But it was Watford that broke the deadlock and never looked back.
Nathaniel Chalobah, so commanding in midfield, flicked the ball out to the right for Anya and he crossed for the unmarked Deeney to head home from six yards in front of the Tilton Road Stand.
And the lively Anya doubled Watford's advantage just before half-time, teasing Paul Robinson - yet again - before drilling straight through Butland.
The home side went in search of a quick route back into the game at the start of the second half, Peter Lovenkrands denied from close range before Wes Thomas agonisingly came within inches of connecting with Paul Caddis' cross.
But it was Watford, so clinical going forward, who added a third shortly after the hour mark as a well-worked move finished with Anya squaring for Deeney to convert.
There was still time for Abdi to add a fourth in the closing stages after Butland had parried Cristian Battocchio's effort to the edge of the area.