Praise be to Allah.
Your wife has no connection to the children of her sister’s husband, because they are not her sister’s children, either by descent or through breastfeeding. Based on this, you wife has to observe hijab in front of this boy because he is a “stranger” (non-mahram) to her.
By the same token you are a non-mahram to this girl, so it is not permissible for you to be alone with her or to travel with her, and it is not permissible for her to uncover her face in front of you.
With regard to the wife of the children’s father, she does not have to observe hijab in front of them because they are among her mahrams. Allaah says (interpretation of the meaning):
“And marry not women whom your fathers married, except what has already passed”
This aayah means that it is not permissible for a man to marry a woman whom his father or grandfather had married, no matter how far along the line of ascent, regardless of whether the father or grandfather is through his mother’s line or his father’s, and regardless of whether the marriage was consummated or not.
If a man has entered into a valid marriage contact with a woman, she becomes a mahram for his sons and grandsons through his sons and daughters, no matter how far the line of descent extends.
Shaykh Ibn ‘Uthaymeen (may Allaah have mercy on him), al-Fataawa al-Jaami’ah, 2/591
See also question no. 20750, 5538
And Allaah knows best.