What does update_terminal_cwd do in the terminal of OS X
It updates the prompt to echo the Current Working Directory (CWD) and is defined in /etc/bashrc:

update_terminal_cwd() {
    # Identify the directory using a "file:" scheme URL,
    # including the host name to disambiguate local vs.
    # remote connections. Percent-escape spaces.
    local SEARCH=' '
    local REPLACE='%20'
    local PWD_URL="file://$HOSTNAME${PWD//$SEARCH/$REPLACE}"
    printf '\e]7;%s\a' "$PWD_URL"
}