@simonk Thanks for that useful investigation. Both of you could address the issue by entering your WP domains in the site setting disabled image download domains.
If you’re looking to go deeper into the issue, i.e. trying to handle this in some automated fashion, the difference between @mattdm’s case and yours points to the complexity there. He’s expecting the browser’s treatment of HTML <p> and <img> elements to be carried over in the form of a line break in the markdown, whereas you’re expecting almost (not quite) the opposite, i.e. for the image to be still displayed inline with the same dimensions as the existing <img> in the original HTML.
For more on this aspect of the issue you can see the existing posts on this, e.g.