Use Options | Display tab, click the Show Dual Previews box, to make this easier.
Method 1...
On track one, position and size the image insert using the Motion effect.
On the track two background, apply a Circular Mask, then the Transparency effect at zero Opacity.
Position and size the mask to match up with the insert image. Apply Feathering if desired, to soften the edge.

Method 2...
First determine that both the background image and the insert are the same resolution.
If not, either export one of the two at the other's res and aspect ratio or grab a screenshot with that setting.
Track one: Add the Motion effect to the insert image. Resize and reposition it as needed.
Add a Circular Mask. Enclircle the mask directly over the insert image.
Track two: Right-click anywhere in the track and Apply Last Video Effect.
Add a Transparency effect with Opacity set to zero.