As long as the steppers are running relatively slowly, let's say a few hundred steps per second, you should be fine.
Your driver uses PWM to control the current through the motor windings. In microstepping mode the driving waveform at the motor terminals looks like a sine and cosine (sines offset by 90 degrees) and the driver modulates the outputs to maintain the current to the windings.
The 1.2A appears to be peak current. So at standstill we're talking 1.2A*4V = 4.8W max per phase (though a microstepping driver will never drive those two phases "fully" simultaneously). At any rate, at very slow speeds/standing we're talking about ~13W for the two motors vs. your 40W power supply. So no problem.
As you start speeding things up two things happen:
- The motors starts acting as a generator producing counter-EMF (and we don't know the Ke constant for those motors). Now to maintain the same current your driver has to overcome this counter-EMF. This is why you want the highest voltage you can get if you're planning to run your motors at speed.
- We are going through the microstepping waveform and really start caring more about the RMS current (So we can effectively divide by ~1.4 since the power supply doesn't care about peak current as much over very short durations). So about 0.86A RMS per phase. That adds up to ~3.42A which is still lower (though not by much, than your 3.5A supply).
So as long as you're well below a speed where your back-EMF is ~8V you're fine. If you plan to go to this point or above it you'll run out of voltage and you're also left with relatively small margins on power. It also depends on how much power you need for the rest of your system. Unfortunately I'm not quite sure how to calculate the back-EMF constant (Ke) from your motor parameters. Looking at the pulling torque curve (given with a 24V supply) I would guess that up to 1000-2000pps you'll still be OK and it looks like the torque is dropping by ~25% over ~1500pps so it's probably in the range of 6V/1500pps (very rough guess). Since we know the inductance maybe someone can show us how to calculate back-EMF constant (I'd be interested in learning)...