As it turns out, Xcode Cloud is not having any trouble fetching the images. The issue was that Xcode Cloud builds the tests on one machine and then passes the test bundle onto another machine which doesn't have access to the repo, so it doesn't have any of the images. Needed to use symlinks and Xcode Cloud build scripts to fix it.

getting same issue

Same issue Massively annoying. Extremely disappointing. Created a ticket on https://feedbackassistant.apple.com/ (FB9102671) Doesn't do much but it's a way to vent your frustration.  ¯_(ツ)_/¯