I have nore then 40 GB of free space but bootcamp still asks me for more

https://support.apple.com/en-us/HT201468 says you need as little as 64GB for Win 10 though I've gotten away with making a partition that's 55GB but that was when I was using High Sierra. My current BootCamp installation at home has a 100GB partition and at some point I'm going to be forced to increase it because I'm getting close to a full drive.

You also need to keep enough storage space available for macOS to use as well. Usually 20GB of free space for macOS is recommended. If you run out of storage space when using the APFS file system, then you could be unable to save or even delete files from your SSD. Unfortunately a 120GB SSD is not large enough to support using two operating systems.

Is it possible to install Windows to an external drive instead? I don't use Bootcamp so I don't know what Apple allows.

Otherwise you will need to replace the original Apple SSD and upgrade to a larger third party SSD. Since Apple uses a proprietary SSD connector in the MBAir 2017 check out OWC for compatible SSD upgrades for your MBAir.

https://eshop.macsales.com/shop/ssd/owc/macbook-air

If you do upgrade to a larger SSD, then I highly recommend that you consider installing Windows into a Virtual Machine if your needs support it. Besides not having to deal with rebooting all the time, a VM minimizes the chances of destroying both macOS and Windows partitions. These forums are filled with posts of broken systems either when installing Windows or when uninstalling Windows. Of course sometimes a VM is not sufficient and you will need to use Bootcamp.

Just make sure to have good verified working backups before you do anything. And keep regular backups since data recovery from an SSD is nearly impossible when you accidentally delete an important file. Plus SSDs can fail at any time without any warning signs.

Good luck.