1. Set the full file path of the Attachment to a variable.
This step is just an example. You may already have the path in a variable or a datatable.

2. Get the filename with extension from the above path.
Disable all other output variables and enable only the one shown below.

3. 'Launch Outlook' action
4. Add the below parameters to 'Send email message through Outlook'.
The <img> tag is an html tag and the source attribute requires the ContentId of the image.
Therefore, use <img src='cid:%FileName%'> where FileName variable is derived from Step 2.
Make sure to enable 'Body is HTML' as shown below.
You still need to add the full image path as an attachment in the Attachment(s) parameter below.

- For the Account Name, use the below section shown in Outlook.
OR right click on it and Select Data File Properties.
OR Go to File menu -> Account settings -> Account settings

5. That's it. The entire Flow looks as below.

Output after running the Flow:
There is no file attached but the image will be embedded within the body of the email.

PS:
- Flow is built in PAD v2.18
- Copy the content of the attached text file and Paste it into a blank Flow editor