The 24-year-old has spent pre-season with the Hornets and is Renee Hector’s first signing as head coach.
She made 36 appearances for Palace over two seasons, helping the side win promotion to the Women’s Super League last term.
Filbey has been capped seven times by Wales having made her debut against against Belarus in 2019.
Filbey spent eight years at Arsenal before joining north London rivals Tottenham in 2018, where she won a first promotion and signed a first professional contract.
During her time at Spurs, Filbey went to Celtic on loan, scoring 10 goals.
She then headed back to London to play for Charlton Athletic before signing for Palace in 2022.
"I know first-hand how much quality she has on the ball and her versatility between defence and midfield makes her a really strong option for us,” said Hector.
“She is also a top girl and has settled into our environment brilliantly. We're looking forward to having her in the side this season.”
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