Cancelo has been in inspired form for Pep Guardiola’s side this term, providing numerous assists and two goals to go alongside his fine defensive work.
The 27-year-old has also demonstrated his tactical adaptability by pushing further forward with great assurance to add an extra dimension to City's attacking outlets.
And speaking at today's pre-match press conference ahead of Wednesday’s latest Champions League group game at home to Paris Saint-Germain, Gundogan was quick to salute Cancelo’s impact, describing him as a ‘crucial’ part of Guardiola’s squad.
“Joao rarely loses a ball and with the ball it feels like he always finds solutions, with a dribble, a pass, a decisive moment like he has done in all of the recent games,” said Gundogan.
“I think with Joao in the last few months he has been able to minimise mistakes and maximise the outcome of his individual situations.
“He is really a joy to watch at the moment. He is an attacking full-back but he is strong one on one. He is very important… he is crucial.
“He is a very funny person and likes to joke around with the others.
“It is obviously he loves football so much.
“Hopefully he can maintain that level of form because that will help us to achieve even more wins this season.”
City will kick off against Mauricio Pochettino’s side needing just a point to seal our place in the Champions League last 16.
And the German international said being able to test our quality against one of Europe’s leading sides captured the very essence of the Champions League
“That’s what this competition is about,” Gundogan added.
“To play against the best teams in the world. PSG definitely belongs in the best teams. It is a great game for us.
“I also think in terms of what to expect in the near future of this competition once the group stage is done - it is not done yet for us we need one point - but as I said before it is what this competition is about.
“We are looking forward to it. It is a joy to play these kinds of teams and to see ourselves how we are able to do against these kinds of opponents.”
Gundogan also said he was inspired by the fact that City came so near to European glory last term, losing out to Chelsea 1-0 in the final.
It was Gundogan’s second loss in a final with the 31-year-old also being part of the Borussia Dortmund side that was defeated in the 2013 final to Bayern Munich.
And he said such memories only further fuelled his desire to succeed in Europe’s premier cup competition.
“I just think that having that game of the final last season still in our minds will give us some more motivation even though it is not needed,” Gundogan added.
“Once you have been in the final you always want to go back. I feel privileged that I was able to play twice in the final. Unfortunately, I lost twice.
“There is still something left for me to achieve in this competition. I will try my best to get to the final, whether it is this year or another.
“It is about that will to go as far as possible and then that combination, of a little bit of luck and the right qualities and the right players.
“We can do it, that should be the target for us.”