diff --git a/src/vs/platform/terminal/common/terminal.ts b/src/vs/platform/terminal/common/terminal.ts
index 246ccaf6a76..a0572cd37a2 100644
--- a/src/vs/platform/terminal/common/terminal.ts
+++ b/src/vs/platform/terminal/common/terminal.ts
@@ -928,6 +928,7 @@ export type ITerminalProfileObject = ITerminalExecutable | ITerminalProfileSourc
 export interface IShellIntegration {
 	readonly capabilities: ITerminalCapabilityStore;
 	readonly status: ShellIntegrationStatus;
+	updateCwd(newCwd: string): void;
 
 	readonly onDidChangeStatus: Event<ShellIntegrationStatus>;
 
diff --git a/src/vs/platform/terminal/common/xterm/shellIntegrationAddon.ts b/src/vs/platform/terminal/common/xterm/shellIntegrationAddon.ts
index 8221ad5c282..0833b41fb8c 100644
--- a/src/vs/platform/terminal/common/xterm/shellIntegrationAddon.ts
+++ b/src/vs/platform/terminal/common/xterm/shellIntegrationAddon.ts
@@ -439,7 +439,7 @@ export class ShellIntegrationAddon extends Disposable implements IShellIntegrati
 						return true;
 					}
 					case 'Cwd': {
-						this._updateCwd(value);
+						this.updateCwd(value);
 						return true;
 					}
 					case 'IsWindows': {
@@ -487,7 +487,7 @@ export class ShellIntegrationAddon extends Disposable implements IShellIntegrati
 		}
 	}
 
-	private _updateCwd(value: string) {
+	updateCwd(value: string) {
 		value = sanitizeCwd(value);
 		this._createOrGetCwdDetection().updateCwd(value);
 		const commandDetection = this.capabilities.get(TerminalCapability.CommandDetection);
@@ -518,7 +518,7 @@ export class ShellIntegrationAddon extends Disposable implements IShellIntegrati
 				switch (key) {
 					case ITermOscPt.CurrentDir:
 						// Encountered: `OSC 1337 ; CurrentDir=<Cwd> ST`
-						this._updateCwd(value);
+						this.updateCwd(value);
 						return true;
 				}
 			}
@@ -538,7 +538,7 @@ export class ShellIntegrationAddon extends Disposable implements IShellIntegrati
 			case '9':
 				// Encountered `OSC 9 ; 9 ; <cwd> ST`
 				if (args.length) {
-					this._updateCwd(args[0]);
+					this.updateCwd(args[0]);
 				}
 				return true;
 		}
@@ -560,7 +560,7 @@ export class ShellIntegrationAddon extends Disposable implements IShellIntegrati
 		if (command.match(/^file:\/\/.*\//)) {
 			const uri = URI.parse(command);
 			if (uri.path && uri.path.length > 0) {
-				this._updateCwd(uri.path);
+				this.updateCwd(uri.path);
 				return true;
 			}
 		}
diff --git a/src/vs/workbench/contrib/terminal/browser/terminalInstance.ts b/src/vs/workbench/contrib/terminal/browser/terminalInstance.ts
index df286dd974a..f90c28a0007 100644
--- a/src/vs/workbench/contrib/terminal/browser/terminalInstance.ts
+++ b/src/vs/workbench/contrib/terminal/browser/terminalInstance.ts
@@ -873,6 +873,12 @@ export class TerminalInstance extends Disposable implements ITerminalInstance {
 		return xterm;
 	}
 
+	private _setCwdForShellIntegration(): void {
+		if (this.shellLaunchConfig.attachPersistentProcess?.cwd) {
+			this.xterm?.shellIntegration.updateCwd(this.shellLaunchConfig.attachPersistentProcess?.cwd);
+		}
+	}
+
 	async runCommand(commandLine: string, shouldExecute: boolean): Promise<void> {
 		let commandDetection = this.capabilities.get(TerminalCapability.CommandDetection);
 
@@ -884,6 +890,7 @@ export class TerminalInstance extends Disposable implements ITerminalInstance {
 					store.add(this.capabilities.onDidAddCapabilityType(e => {
 						if (e === TerminalCapability.CommandDetection) {
 							commandDetection = this.capabilities.get(TerminalCapability.CommandDetection);
+							this._setCwdForShellIntegration();
 							r();
 						}
 					}));
@@ -892,6 +899,7 @@ export class TerminalInstance extends Disposable implements ITerminalInstance {
 			]);
 			store.dispose();
 		}
+		this._setCwdForShellIntegration();
 
 		// Determine whether to send ETX (ctrl+c) before running the command. This should always
 		// happen unless command detection can reliably say that a command is being entered and
@@ -980,6 +988,7 @@ export class TerminalInstance extends Disposable implements ITerminalInstance {
 		}
 
 		this._register(xterm.shellIntegration.onDidChangeStatus(() => {
+			this._setCwdForShellIntegration();
 			if (this.hasFocus) {
 				this._setShellIntegrationContextKey();
 			} else {
@@ -1395,7 +1404,7 @@ export class TerminalInstance extends Disposable implements ITerminalInstance {
 					break;
 				case ProcessPropertyType.InitialCwd:
 					this._initialCwd = value;
-					this._cwd = this._initialCwd;
+					this._cwd = this._cwd ?? this._initialCwd;
 					this._setTitle(this.title, TitleEventSource.Config);
 					this._icon = this._shellLaunchConfig.attachPersistentProcess?.icon || this._shellLaunchConfig.icon;
 					this._onIconChanged.fire({ instance: this, userInitiated: false });