Fig.: to be out of touch with reality; to daydream; to be unrealistic

“What's going on with Jane? I see her being up in the clouds all day long” “Who knows! She's probably in love”

“Che cosa succede a Jane? La vedo tutto il giorno con la testa tra le nuvole” “Chissà! Sarà innamorata!”

That guy is quite a puzzle. He can hear well but doesn't seem to hear. Maybe it's because he's always got his head in the clouds!

Quel ragazzo è un bel rebus. Ci sente bene ma sembra non sentire. Forse perché ha sempre la testa fra le nuvole!

They say that a good artist should have his head in the clouds every now and then, but his feet always on the ground

Si dice che un buon artista ogni tanto dovrebbe avere la testa fra le nuvole, ma sempre i piedi ben piantati per terra

He's a learned and brilliant scholar, but always with his head in the clouds. The typical absent-minded professor

É uno studioso brillante ed erudito, ma immancabilmente con la testa tra le nuvole

“Why didn't you make it to the meeting today?” “What? Isn't it next week?” "I don't know what's going on with you, but you seem to have your head in the clouds these days”

“Perché non sei venuto alla riunione oggi?” “Ma come! Non è per settimana prossima?” “Non so cosa ti stia succedendo, ma in questo periodo hai proprio la testa tra le nuvole”

Clearly having one's head in the clouds – so far high in the sky - means being far away from the reality of daily life on earth.
The expression, however, may also refer to Aristophanes' play The Clouds (423 B.C.), in which Socrates is depicted as a philosopher devoted to useless talk and reasoning: he sits in mid-air in a basket to "clear his thoughts" or debates about futile things, such as the length of a flea's leap.