diff --git a/cli/daemon/run/embedded_files.go b/cli/daemon/run/embedded_files.go
new file mode 100644
index 0000000000..0a26d043ba
--- /dev/null
+++ b/cli/daemon/run/embedded_files.go
@@ -0,0 +1,127 @@
+package run
+
+import (
+	"encr.dev/pkg/watcher"
+	"fmt"
+	"os"
+	"path/filepath"
+	"strings"
+)
+
+var embeddedFiles = make(map[string][]string)
+
+// ignoreEventEmbedded checks whether the event is related to an embedded file
+func ignoreEventEmbedded(event watcher.Event) (bool, error) {
+	switch event.EventType {
+	case watcher.CREATED:
+		return true, handleCreatedFile(event.Path)
+	case watcher.DELETED:
+		return true, handleDeletedFile(event.Path)
+	case watcher.MODIFIED:
+		return handleModifiedFile(event.Path)
+	default:
+		return true, nil
+	}
+}
+
+func handleModifiedFile(path string) (bool, error) {
+	if strings.HasSuffix(path, ".go") {
+		return true, updateEmbeddedFiles(path)
+	}
+
+	embedded, err := isFileEmbedded(path)
+	if err != nil {
+		return true, err
+	}
+
+	return !embedded, nil
+}
+
+func initializeEmbeddedFilesTracker(root string) error {
+	if len(embeddedFiles) > 0 {
+		return nil
+	}
+
+	return filepath.Walk(root, func(path string, info os.FileInfo, err error) error {
+		if err != nil || info.IsDir() || filepath.Ext(path) != ".go" {
+			return err
+		}
+		return updateEmbeddedFiles(path)
+	})
+}
+
+func handleCreatedFile(path string) error {
+	if strings.HasSuffix(path, ".go") {
+		return updateEmbeddedFiles(path)
+	}
+	return nil
+}
+
+func handleDeletedFile(path string) error {
+	delete(embeddedFiles, path)
+	return nil
+}
+
+func isFileEmbedded(fpath string) (bool, error) {
+	for _, files := range embeddedFiles {
+		for _, file := range files {
+			if file == fpath {
+				return true, nil
+			}
+		}
+	}
+	return false, nil
+}
+
+func updateEmbeddedFiles(path string) error {
+	embeds, err := parseEmbeddedFiles(path)
+	if err != nil {
+		return fmt.Errorf("failed to parse embedded files: %w", err)
+	}
+	embeddedFiles[path] = embeds
+	return nil
+}
+
+// parseEmbeddedFiles returns all the embedded files for a given source file
+func parseEmbeddedFiles(sourceFile string) ([]string, error) {
+	data, err := os.ReadFile(sourceFile)
+	if err != nil {
+		return nil, fmt.Errorf("failed to read source file: %w", err)
+	}
+
+	var embeddedPaths []string
+	sourceDir := filepath.Dir(sourceFile)
+	lines := strings.Split(string(data), "\n")
+
+	for _, line := range lines {
+		line = strings.TrimSpace(line)
+		if strings.HasPrefix(line, "//go:embed") {
+			parts := strings.Fields(line)
+			if len(parts) > 1 {
+				dir := parts[1]
+				filepaths, err := getFilePathsFromDir(filepath.Join(sourceDir, dir))
+				if err != nil {
+					return nil, err
+				}
+				embeddedPaths = append(embeddedPaths, filepaths...)
+			}
+		}
+	}
+	return embeddedPaths, nil
+}
+
+// getFilePathsFromDir retrieves all file paths from a directory recursively
+func getFilePathsFromDir(dir string) ([]string, error) {
+	var filePaths []string
+	err := filepath.Walk(dir, func(path string, info os.FileInfo, err error) error {
+		if err != nil || info.IsDir() {
+			return err
+		}
+		filePaths = append(filePaths, path)
+		return nil
+	})
+	if err != nil {
+		return nil, fmt.Errorf("failed to walk through directory %s: %w", dir, err)
+	}
+	return filePaths, nil
+}
diff --git a/cli/daemon/run/watch.go b/cli/daemon/run/watch.go
index 3b453d1194..2077402278 100644
--- a/cli/daemon/run/watch.go
+++ b/cli/daemon/run/watch.go
@@ -11,6 +11,12 @@ import (
 // watch watches the given app for changes, and reports
 // them on c.
 func (mgr *Manager) watch(run *Run) error {
+
+	// Initialize embedded files tracker
+	if err := initializeEmbeddedFilesTracker(run.App.Root()); err != nil {
+		return err
+	}
+
 	sub, err := run.App.Watch(func(i *apps.Instance, event []watcher.Event) {
 		if IgnoreEvents(event) {
 			return
@@ -44,10 +50,22 @@ func (mgr *Manager) watch(run *Run) error {
 }
 
 // IgnoreEvents will return true if _all_ events are on files that should be ignored
-// as the do not impact the running app, or are the result of Encore itself generating code.
+// as they do not impact the running app, or are the result of Encore itself generating code.
 func IgnoreEvents(events []watcher.Event) bool {
 	for _, event := range events {
-		if !ignoreEvent(event) {
+		filename := filepath.Base(event.Path)
+		if strings.HasPrefix(strings.ToLower(filename), "encore.gen.") ||
+			strings.HasSuffix(filename, "~") {
+			// Ignore generated code and temporary files
+			return true
+		}
+
+		ignore, err := ignoreEventEmbedded(event)
+		if err != nil {
+			return false
+		}
+
+		if !ignoreEvent(event) || !ignore {
 			return false
 		}
 	}
@@ -55,12 +73,6 @@ func IgnoreEvents(events []watcher.Event) bool {
 }
 
 func ignoreEvent(ev watcher.Event) bool {
-	filename := filepath.Base(ev.Path)
-	if strings.HasPrefix(strings.ToLower(filename), "encore.gen.") {
-		// Ignore generated code
-		return true
-	}
-
 	// Ignore files which wouldn't impact the running app
 	ext := filepath.Ext(ev.Path)
 	switch ext {