The Windows Phone 7 keyboard received much praise, and Microsoft intended to improve on this in Windows Phone 8.
They introduced Wordflow, which looks not just at a single word, but at a series of words to provide more accurate word prediction. Microsoft says they surveyed a dictionary of 2.5 billion words built from Wikipedia and Twitter scraping, and selected 600,000 for the on-device dictionary, resulting in word correction which was 94% accurate, and always learning to get even better over time.
Of course the dictionary will still not help you swear, but then you cant have everything ūüėČ
Read more about the keyboard technology at Microsoft here.