diff --git a/backend/src/terminal/sftp.gateway.ts b/backend/src/terminal/sftp.gateway.ts
index 2dfc657..745b4a9 100644
--- a/backend/src/terminal/sftp.gateway.ts
+++ b/backend/src/terminal/sftp.gateway.ts
@@ -59,26 +59,44 @@ export class SftpGateway {
 
     switch (msg.type) {
       case 'list': {
-        this.logger.log(`[SFTP] readdir starting for path: "${msg.path}"`);
-        try {
-          sftp.readdir(msg.path, (err: any, list: any[]) => {
-            this.logger.log(`[SFTP] readdir callback fired, err=${err?.message || 'null'}, entries=${list?.length || 0}`);
-          if (err) return this.send(client, { type: 'error', message: err.message });
-          const entries = list.map((f: any) => ({
-            name: f.filename,
-            path: `${msg.path === '/' ? '' : msg.path}/${f.filename}`,
-            size: f.attrs.size,
-            isDirectory: (f.attrs.mode & 0o40000) !== 0,
-            permissions: (f.attrs.mode & 0o7777).toString(8),
-            modified: new Date(f.attrs.mtime * 1000).toISOString(),
-          }));
-          this.logger.log(`[SFTP] Sending list response with ${entries.length} entries, client.readyState=${client.readyState}`);
-          this.send(client, { type: 'list', path: msg.path, entries });
-          });
-        } catch (syncErr: any) {
-          this.logger.error(`[SFTP] readdir threw synchronously: ${syncErr.message}`);
-          this.send(client, { type: 'error', message: syncErr.message });
-        }
+        // Resolve '~' to the user's home directory via SFTP realpath('.')
+        const resolvePath = (path: string, cb: (resolved: string) => void) => {
+          if (path === '~') {
+            sftp.realpath('.', (err: any, absPath: string) => {
+              if (err) {
+                this.logger.warn(`[SFTP] realpath('.') failed, falling back to /: ${err.message}`);
+                cb('/');
+              } else {
+                cb(absPath);
+              }
+            });
+          } else {
+            cb(path);
+          }
+        };
+
+        resolvePath(msg.path, (resolvedPath) => {
+          this.logger.log(`[SFTP] readdir starting for path: "${resolvedPath}"`);
+          try {
+            sftp.readdir(resolvedPath, (err: any, list: any[]) => {
+              this.logger.log(`[SFTP] readdir callback fired, err=${err?.message || 'null'}, entries=${list?.length || 0}`);
+              if (err) return this.send(client, { type: 'error', message: err.message });
+              const entries = list.map((f: any) => ({
+                name: f.filename,
+                path: `${resolvedPath === '/' ? '' : resolvedPath}/${f.filename}`,
+                size: f.attrs.size,
+                isDirectory: (f.attrs.mode & 0o40000) !== 0,
+                permissions: (f.attrs.mode & 0o7777).toString(8),
+                modified: new Date(f.attrs.mtime * 1000).toISOString(),
+              }));
+              this.logger.log(`[SFTP] Sending list response with ${entries.length} entries, client.readyState=${client.readyState}`);
+              this.send(client, { type: 'list', path: resolvedPath, entries });
+            });
+          } catch (syncErr: any) {
+            this.logger.error(`[SFTP] readdir threw synchronously: ${syncErr.message}`);
+            this.send(client, { type: 'error', message: syncErr.message });
+          }
+        });
         break;
       }
       case 'read': {
diff --git a/backend/src/terminal/ssh-connection.service.ts b/backend/src/terminal/ssh-connection.service.ts
index 63956a7..359a6dd 100644
--- a/backend/src/terminal/ssh-connection.service.ts
+++ b/backend/src/terminal/ssh-connection.service.ts
@@ -49,6 +49,20 @@ export class SshConnectionService {
           this.sessions.set(sessionId, session);
 
           stream.on('data', (data: Buffer) => onData(data.toString('utf-8')));
+
+          // Shell integration: inject PROMPT_COMMAND (bash) / precmd (zsh) to emit
+          // OSC 7 escape sequences reporting the current working directory on every prompt.
+          // Leading space prevents the command from being saved to shell history.
+          // The frontend captures OSC 7 via xterm.js and syncs the SFTP sidebar.
+          const shellIntegration =
+            ` if [ -n "$ZSH_VERSION" ]; then` +
+            ` __wraith_cwd(){ printf '\\e]7;file://%s%s\\a' "$HOST" "$PWD"; };` +
+            ` precmd_functions+=(__wraith_cwd);` +
+            ` elif [ -n "$BASH_VERSION" ]; then` +
+            ` PROMPT_COMMAND='printf "\\033]7;file://%s%s\\a" "$HOSTNAME" "$PWD"';` +
+            ` fi\n`;
+          stream.write(shellIntegration);
+
           stream.on('close', () => {
             this.disconnect(sessionId);
             onClose('Session ended');
diff --git a/frontend/components/sftp/SftpSidebar.vue b/frontend/components/sftp/SftpSidebar.vue
index e785313..c22fd0b 100644
--- a/frontend/components/sftp/SftpSidebar.vue
+++ b/frontend/components/sftp/SftpSidebar.vue
@@ -1,17 +1,32 @@
 <script setup lang="ts">
-import { ref, computed, onMounted } from 'vue'
+import { ref, computed, onMounted, watch } from 'vue'
 import { useSftp } from '~/composables/useSftp'
+import { useSessionStore } from '~/stores/session.store'
 
 const props = defineProps<{
   sessionId: string | null
 }>()
 
+const sessions = useSessionStore()
 const sessionIdRef = computed(() => props.sessionId)
 const {
   entries, currentPath, fileContent,
   connect, disconnect, list, readFile, writeFile, mkdir, rename, remove, download, upload,
 } = useSftp(sessionIdRef)
 
+// Track the terminal's current working directory from the session store
+const sessionCwd = computed(() => {
+  if (!props.sessionId) return null
+  return sessions.sessions.find(s => s.id === props.sessionId)?.cwd ?? null
+})
+
+// Follow terminal CWD changes — navigate SFTP when the shell's directory changes
+watch(sessionCwd, (newCwd, oldCwd) => {
+  if (newCwd && newCwd !== oldCwd && newCwd !== currentPath.value) {
+    list(newCwd)
+  }
+})
+
 const width = ref(260) // resizable sidebar width in px
 const isDragging = ref(false)
 const newFolderName = ref('')
@@ -42,7 +57,7 @@ function handleFileSelected(event: Event) {
 
 onMounted(() => {
   connect()
-  list('/')
+  list('~') // Backend resolves ~ to user's home directory via SFTP realpath('.')
 })
 
 function navigateTo(path: string) {
diff --git a/frontend/composables/useTerminal.ts b/frontend/composables/useTerminal.ts
index 0bf025f..37a9387 100644
--- a/frontend/composables/useTerminal.ts
+++ b/frontend/composables/useTerminal.ts
@@ -58,6 +58,28 @@ export function useTerminal() {
   function connectToHost(hostId: number, hostName: string, protocol: 'ssh', color: string | null, pendingSessionId: string, term: Terminal, fitAddon: FitAddon) {
     const wsUrl = `${location.protocol === 'https:' ? 'wss' : 'ws'}://${location.host}/api/ws/terminal?token=${auth.token}`
     ws = new WebSocket(wsUrl)
+    let realSessionId: string | null = null
+
+    // Capture OSC 7 (CWD reporting) from the remote shell.
+    // Format: file://hostname/absolute/path
+    // The shell integration injected by the backend emits this on every prompt.
+    term.parser.registerOscHandler(7, (data) => {
+      if (!realSessionId) return false
+      try {
+        const url = new URL(data)
+        const path = decodeURIComponent(url.pathname)
+        if (path) {
+          sessions.updateCwd(realSessionId, path)
+        }
+      } catch {
+        // Fallback: try to extract path after file://hostname
+        const match = data.match(/^file:\/\/[^/]*(\/.*?)$/)
+        if (match?.[1]) {
+          sessions.updateCwd(realSessionId, match[1])
+        }
+      }
+      return false
+    })
 
     ws.onopen = () => {
       ws!.send(JSON.stringify({ type: 'connect', hostId }))
@@ -67,6 +89,7 @@ export function useTerminal() {
       const msg = JSON.parse(event.data)
       switch (msg.type) {
         case 'connected':
+          realSessionId = msg.sessionId
           // Replace the pending placeholder with the real backend session
           sessions.replaceSession(pendingSessionId, { key: pendingSessionId, id: msg.sessionId, hostId, hostName, protocol, color, active: true })
           // Send initial terminal size
diff --git a/frontend/stores/session.store.ts b/frontend/stores/session.store.ts
index af9109e..5ee13d8 100644
--- a/frontend/stores/session.store.ts
+++ b/frontend/stores/session.store.ts
@@ -8,6 +8,7 @@ interface Session {
   protocol: 'ssh' | 'rdp'
   color: string | null
   active: boolean
+  cwd?: string      // current working directory (SSH only, set via OSC 7 shell integration)
 }
 
 export const useSessionStore = defineStore('sessions', {
@@ -44,5 +45,11 @@ export const useSessionStore = defineStore('sessions', {
     setActive(id: string) {
       this.activeSessionId = id
     },
+    updateCwd(sessionId: string, cwd: string) {
+      const session = this.sessions.find(s => s.id === sessionId)
+      if (session) {
+        session.cwd = cwd
+      }
+    },
   },
 })