The status of East Jerusalem, like all other final settlement issues, will only be resolved in negotiations. The Palestinians have their negotiating position. Israel has its. Both parties have needs in East Jerusalem and, as a result, I suspect some kind of compromise (probably a joint sovereignty concept or status on various holy sites) will be required to accommodate their core needs. Neither party will achieve its maximum demands.
Moreover, under international law, neither party is entitled to its maximum demands. The reflexive argument made by some that the Palestinians are entitled to all of East Jerusalem has no more basis in fact under international law than the automatic position that Israel is entitled to all of East Jerusalem. The reality is that the final status of all boundaries (including those associated with Jerusalem) remained to be resolved following the 1948 war. The 1949 armistice agreements that left East Jerusalem in the possession of Jordan following that war did not confer upon Jordan and, by extension the Palestinians in the future via Jordan's transferring its claims over the West Bank, etc., to the Palestinians, the right to retain that area that Jordan had won in the war. Otherwise, if Jordan's territorial gains during the 1948 war conferred upon Jordan/the Palestinians automatic territorial legitimacy over East Jerusalem, Israel's gaining that territory in the 1967 war would have had the same effect under identical principles applied consistently. That is not the case.
Of course, from the practical perspective, possession is a consideration that cannot be ignored completely. It does matter in that it shapes the contours of what is possible e.g., negotiating positions and practicalities as to changes that might occur given power realities among other factors that provide negotiating leverage.
Nevertheless, the larger principle that final boundaries, including those that pertain to East Jerusalem, are to be resolved in negotiations remains paramount. It will be the agreed outcome of negotiations that supplies legitimacy to the resolution of the historic dispute. Outside parties will not be able to dictate/impose terms that ignore the needs of either party to the historic dispute, though they could offer guidance and suggestions. The parties to the conflict will have to resolve the issues on their own and both sides will need to compromise so as to accommodate the core needs of the other if agreement is to be reached.