Pseudouridylation (Ψ) is the most abundant and widespread type of RNA epigenetic modification in living organisms; however, the biological role of Ψ remains poorly understood. Here, we show that a Ψ-driven posttranscriptional program steers translation control to impact stem cell commitment during early embryogenesis. Mechanistically, the Ψ ‘writer’ PUS7 modifies and activates a network of tRNA-derived fragments (tRFs) targeting the translation initiation complex. PUS7 inactivation in embryonic stem cells impairs tRF-mediated translational regulation leading to increased protein biosynthesis and abnormal germ layer specification. Remarkably, dysregulation of PUS7 and tRFs in myeloid malignancies associates with altered translation rates, suggesting a role of Ψ in leukemogenesis. Our findings unveil a critical function of Ψ in directing translational control in stem cells with important implications for human disease.