Since the sky is bigger than the fire, if anything the fire would be in the sky. The only reason it makes sense to say "on fire" here is because that is a set phrase for being aflame.

On fire

On fire

on

The correct phrase is "Sky on fire." So, in your example sentence, it would be: "Today's sunset looks like the sky is on fire." This expression is used to vividly describe a colorful and intense sunset where the colors resemble flames, giving the impression that the sky itself is ablaze.