I've seen mosaic pixelation occur sometimes using certain effects (like Gaussian Blur) but the exported output doesn't reflect it.
You should see a camera icon at the top of the text window when replying or starting a new discussion. You use that to insert images.
I'm assuming the first image is the "add image" dialog and the second is the result after import?
I'm trying to repro by bringing in several JPEGs from several sources (locally on tablet; Creative Cloud, etc.) but cannot seem to do so. (Might be something specific to iOS, since that's what it looks like you're using; I'm on Android.)
Out of curiosity, have you exported that project to see if the exported project looks the same as it does in PS Touch?
Yes still blurry when I export... It even does this if I enter the text within the app. My image import settings are set to the max, I have no clue what I'm doing wrong but I cannot create a high resolution image on this app
Not sure if this applies, but, in the settings for PS touch you can tell it how large a file to import. I wonder, if this was set too low, would it reduce the size of your image when you open it, thus making it look pixelated because it has much fewer pixels?
I have this set fairly high because my camera takes large images.
Just a thought. David.