Creating a fog effect with gouache is a very easy and fun process. I usually use gouache because I like the opaqueness. But first and most important step after finishing the line work is masking. I use masking tape and a razor and go over the parts I don't want the background to bleed into, but there's also other products like masking markers or paint. If you decide to use tape, make sure to cut the tape right in the middle of the line.
In this case I coloured the background with alcohol markers. Usually I won't go over it with gouache to do the highlights because I prefer to do that in the end. However here I was going to cover half of the background with fog so it was best to finish all background highlights before this step so that they blend in better.
Since the fog was going to be a lighter colour than the rest, in order to stand out I coloured the lower part of the street as dark as possible, without giving much attention to detail (1st and 3rd picture) In the end it's all going to be covered so no need to blend colours perfectly.
I'm sure there are sponges specifically made for that. In the past I've used dish washing sponges but now I prefer make up sponges used for contouring. They are round in the edge and they are perfect for fog or cloud effect.
To give the fog different opacities I start by my most watered down shade of gouache and gradually cover it with thicker ones.
After removing the masking tape it's time to colour the main subject in the foreground (the girl in this case).
Then it's time to add fog in the foreground, over the main subject. By separating it in three layers (background with fog, foreground subject, foreground fog) the fog looks more three dimensional. I also added some red in the foreground fog to balance out the colour scene with the reds in the top of the artwork.
Have a look at the video where I use the same technique described above!
You can find the artworks used as examples on my IG: