Unreal currently doesn’t have an input mapping for the Xbox button. In fact, Windows actually takes that input itself to open their Gamebar thing. So the input never actually makes it to Unreal. I even opened up Spyro Reignited (which was made in Unreal) and got the same results.
You could make an action mapping for Shift-Tab (Steam’s default to open the overlay) and call your pause there, but I’m actually not sure if Steam will eat the input in the same way Windows will eat the Xbox button.