I happen to have the same engine in my S40. And despite the obvious differences, it shares a
LOT of things with the T5. I would dare to say 95% of the maintenance is the same.
So yeah, I agree with
@AyBlinken on addressing the coolant loss being the priority. These engines DO NOT tolerate very well being overheated.
Doing the combustion leak test it's a great starting point for the troubleshooting. Make sure you do this test with a COLD engine, and I mean not ran for at least 8-12 hours. Hopefully it's something much more simple and not the head gasket.
Common leak points of the cooling system are the quick connectors of the heater core hoses at the firewall (happened to me), thermostat housing (also happened to me), the upper radiator hose "T" fitting, and the coolant reservoir cracking. All of them are made of a plastic composite material that start disintegrating when they're around 10 years old
Also, by looking at the pictures, seems like coolant reservoir cap is an aftermarket one, and read several comments of them not sealing properly and not allowing the coolant to pressurize (which raises the boiling point) which ends up with evaporated coolant being vented out. I have not heard of a genuine cap having this failure, but it's also wise to replace them whey they're too old.
Another test you can do is: after driving the car for a while (enough to let it reach operating temperature), try squeezing by hand the lower radiator hose to see if it feels pressurized, CAREFUL, it will be hot, use a rag if it's too hot for you. And then once the engine has cooled down, try the same, there should be a very noticeable difference.
If you think the cap may be the issue, try replacing it. I bought mine through my local Ford dealer and it was much more cheaper than the genuine Volvo cap, hopefully you can do the same and save some money there, here's the post I made several years ago with pictures and the part numbers:
I'd like to share this info: I bought a cap from my local ford dealer that is the exact same part as the one that came with my car. I paid $18 for it. That same day my local Volvo dealer quoted me $70 for that cap.
Top cap: taken from my car
Bottom: Ford cap
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If the combustion leak test passes and the tank cap seals fine, then you should try pressurizing the cooling system, not more than 145kPa / 21psi (what the cap says), and watch the level, to see if it drops. And if it does, then look for the coolant puddle, it has to be somewhere.
