Replace environment variables in a file with their actual values?

You could use envsubst (part of gnu gettext):

envsubst < infile

will replace the environment variables in your file with their corresponding value. The variable names must consist solely of alphanumeric or underscore ASCII characters, not start with a digit and be nonempty; otherwise such a variable reference is ignored.

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To replace only certain environment variables, see this question.

This is not very nice but it works

( echo "cat <<EOF" ; cat config.xml ; echo EOF ) | sh

If it was in a shell script it would look like:

#! /bin/sh
cat <<EOF
<property>
    <name>instanceId</name>
    <value>$INSTANCE_ID</value>
</property>
EOF

Edit, second proposal:

eval "echo \"$(cat config.xml)\""

Edit, not strictly related to question, but in case of variables read from file:

(. .env && eval "echo \"$(cat config.xml)\"")

If you happen to have Perl (but not gettext and envsubst) you can do the simple replacement with a short script:

$ export INSTANCE_ID=foo; export SERVICE_NAME=bar;
$ perl -pe 's/\$([_A-Z]+)/$ENV{$1}/g'  < config.xml
<property>
    <name>instanceId</name>
    <value>foo</value>
</property>
<property>
    <name>rootPath</name>
    <value>/services/bar</value>
</property>

I assumed the variable names will only have uppercase letters and underscores, but the first pattern should be easy to alter as needed. $ENV{...} references the environment Perl sees.

If you want to support the ${...} syntax or throw an error on unset variables, you'll need some more work. A close equivalent of gettext's envsubst would be:

perl -pe 's/\$(\{)?([a-zA-Z_]\w*)(?(1)\})/$ENV{$2}/g'

Though I feel that feeding variables like that via the process environment seems a bit iffy in general: you can't use arbitrary variables in the files (since they may have special meanings), and some of the values could possibly have at least semi-sensitive data in them.