In a short post on his official Facebook account on Sunday, Morales said he had decided to move the embassy from Tel Aviv after talking to Israeli Prime Minister Benjamin Netanyahu.
On Monday Netanyahu said that the move by Morales is a sign of a changing attitude among the international community.
"From here I would like to say to the President of Guatemala: God bless you, my friend, President Morales. God bless both our countries - Israel and Guatemala. We are waiting for you here in Jerusalem," Netanyahu said at the Knesset. "I told you recently that there will be other countries that would recognise Jerusalem and announce the transfer of their embassies over there. Well here is the second country and I reiterate: There will be more, this is only the beginning."
US President Donald Trump recognized Jerusalem as the capital of Israel on Dec 6, reversing decades of US policy and upsetting the Arab world and Western allies.
On Thursday, 128 countries defied Trump by backing a non-binding UN General Assembly resolution calling on the United States to drop its recognition of Jerusalem.
On Monday, Israeli politicians took turns praising and thanking Morales.
"I congratulate my friend (Morales) on his bold decision to move his country's embassy in Israel to Jerusalem," Israeli Parliamentary Speaker Yuli Edelstein wrote on Twitter. "Your decision proves that you and your country are true friends of Israel."
Guatemala and neighboring Honduras were two of only a handful of countries to join Israel and the United States, which has pledged to move its embassy to Jerusalem, in voting against the UN resolution.
Israel's ambassador to Guatemala, Matty Cohen, said on Army Radio that no date had been set for the embassy move, "but it will happen after" the United States relocates its own embassy to Jerusalem. US officials have said that move could take at least two years.
The United States is an important source of assistance to Guatemala and Honduras, and Trump had threatened to cut off financial aid to countries that supported the UN resolution.
Israeli Justice Minister Ayelet Shaked, writing on Twitter, thanked Morales for what she described as "his courageous decision." She said she was confident that other countries would follow his lead.
Former Education Minister Gideon Saar tweeted his congratulations in English and Public Security Minister Gilad Erdan showed off his Spanish language skills thanking Morales in his native tongue.
The international community does not recognize Israeli sovereignty over the entire city, home to sites holy to the Muslim, Jewish and Christian religions.
Prior to 1980, Guatemala - along with Bolivia, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Haiti, The Netherlands, Panama, Venezuela and Uruguay - maintained an embassy in Jerusalem.
Israel's passage in June 1980 of a law proclaiming Jerusalem its "indivisible and eternal capital" led to a UN Security Council resolution calling upon those countries to move their embassies to Tel Aviv, prompting their transfer.