The 25-year-old has become Wolves' second signing of the summer after the £20.5million capture of Nathan Collins, and adds significant depth and quality to the attacking areas.
The versatile forward can play out wide and more centrally and eases the burden on Wolves' forwards, with Raul Jimenez, Adama Traore and Chiquinho all sidelined with injury.
Guedes is represented by Gestifute and Jorge Mendes, who have close ties to Wolves, and the parties involved have moved quickly to get the deal over the line.
The forward was left out of the squad for Valencia's friendly win over Atalanta on Saturday as Wolves worked to finalise the deal.
Having come through at Benfica, Guedes moved to Paris Saint-Germain in January 2017 before quickly leaving for Valencia on-loan the following summer.
After a year in Spain, Guedes signed permanently with Valencia, where he has enjoyed five successful years making 178 appearances and scoring 36 goals.
Last season he scored 11 goals in 36 league games.
Wolves have been monitored Guedes for some time and looked at making a move for him last summer, before deciding against it - with Chairman Jeff Shi insisting the club had to be patient in their pursuit.
He said: “We have been monitoring Goncalo for a long time and are very pleased to welcome him to Wolves. He has natural talent and has performed very well across Europe and for his country, and we think he is well suited to the Premier League.
“We are always looking to improve the squad with high quality, and have been patient to make sure we got the right player. Goncalo worked with Bruno at Benfica and played with many members of our squad previously, so we’re confident he will settle quickly into the group here.
“Very few transfers are ever straightforward, and this was no exception, with a number of clubs trying to secure the player right up until the last minute. Now, we are delighted that Goncalo is a Wolves player and look forward to giving him a warm welcome at Molineux this Saturday.”