Its president, Jimmy Morales, said the decision was taken after speaking to Israeli PM Benjamin Netanyahu.
Guatemala was one of only nine nations to vote against a UN resolution urging the US to reverse its recognition of Jerusalem as the capital of Israel.
Jerusalem’s status is a highly sensitive issue.
The Palestinians want East Jerusalem as their future capital, and all countries currently keep their embassies in Tel Aviv.
President Trump announced earlier this month that the US was officially recognising Jerusalem as Israel’s capital, a decision that overturned decades of US policy, drew international condemnation and sparked protests across the Muslim world.
He also said he would direct the US state department to begin preparations to move the US embassy from Tel Aviv to Jerusalem.
Noting the “excellent relations” between Guatemala and Israel, he said “one of the most important topics was the return of Guatemala’s embassy to Jerusalem”.
“For this reason I am informing you that I have given instructions to the foreign ministry that it start the necessary respective coordination to make this happen,” he added. He did not say when the move would happen.
Israel has welcomed the announcement, with the foreign ministry saying it was a sign of “true friendship”.
— Emmanuel Nahshon (@EmmanuelNahshon) December 25, 2017
Where does the rest of the world stand?
Last week, UN members decisively backed a resolution that said any decisions regarding the status of the Jerusalem were “null and void” and must be cancelled.
The non-binding resolution was approved by 128 states, with 35 abstaining. Another 21 countries did not turn up for the vote.
How did your country vote?
Aside from the US and Israel, Guatemala was joined by Honduras, the Marshall Islands, Micronesia, Nauru, Palau and Togo in voting against the resolution.
In the run-up to the vote President Trump warned he might cut financial aid to states that voted in favour, and given the US is a major donor to Guatemala analysts say that may be a factor in their thinking.
Mr Netanyahu recently told “several countries” were considering moving their embassies to Jerusalem, but did not specify which.
Why does it matter?
The status of Jerusalem goes to the heart of the Israeli-Palestinian conflict.
Israel regards Jerusalem as its “eternal and undivided” capital, while the Palestinians claim East Jerusalem – occupied by Israel in the 1967 Middle East war – as the capital of a future Palestinian state.
Israeli sovereignty over Jerusalem has never been recognised internationally, and according to the 1993 Israel-Palestinian peace accords, the final status of Jerusalem is meant to be discussed in the latter stages of peace talks.
Since 1967, Israel has built a dozen settlements, home to about 200,000 Jews, in East Jerusalem. These are considered illegal under international law, though Israel disputes this.
Jerusalem is also home to key religious sites sacred to Judaism, Islam and Christianity, especially in East Jerusalem.>