"GTI cloud lookup" and "DNS lookup" are different things!
Assuming you access www.this-is-my-website.com. MWG will look for the domain in the local URL filter database. "GTI cloud lookup" will cause MWG to send the domain to the GTI cloud in case there is no category information in the local database or you enforced asking the cloud.
If "Do a forward DNS lookup" is enabled MWG will lookup the IP address of www.this-is-my-website.com. Now it will look into the local database if there is an entry for the IP, no longer the domain name. If "GTI cloud lookups" are enabled then MWG will send the IP address to the cloud, trying to get a category.
So basically "DNS lookup" options cause MWG to not only use the known information (URL), but also resolve the IP and use it to get category information.
The GTI cloud lookup settings define if MWG only looks into the local database that comes with the regular engine updates, or also do a live lookup to the cloud. The default setting is to only ask the cloud when there is no local result.
In my opiinion the recommended settings are the default setting. We only ask the cloud if there is no result in the local database for performance and security reasons and we should do the DNS lookups to have at least a small chance to get a category in case a URL is not categorized yet.