Hi on my s40 T5 the temp gauge needle stays on half way but the water in the bottle starts to boil.
I checked on a obdII tool and the temp reading on the tools shows about 100deg but needle on gauge still remains at half way.
At what temp does the fan kick inn because I noticed the fan doe not come on at times even at 100deg but does so when I switch car on and off.
When I unplug the coolant sensor the obdII reading shows -40deg, so that seems to be working.

 

The thermostat begins to open at about 90C and it's fully open at about 100C. At these temperatures the needle stays in the middle.

The coolant reservoir cap is known to have a problem with sealing properly, which causes the boiling thing. Try replacing the cap or even just turn the cap seal upside down

 

Also suspecting the cap, I noticed it has two O ring seals but I am not sure of where the smaller seal fits as the caps seems like it has two slots for the small o ring to fit on, currently I have it on the inner ring slot of the cap.....if that makes any sense.