The full-back, widely praised this season for his unique playing style, joined City in 2019.
And after a difficult first season, he has excelled this term, often finding himself in the final third of the pitch influencing our attacking play.
He says he understands the magnitude of the fixture and believes City will play on the front foot and take the game to United.
“A derby is always important,” he said. “There is a big history behind the game and a big history around the city of Manchester.
“But we are City and, as always, we are going to try and win the game.
"We will do everything to win it and I believe our group is ready for what is coming.”
Cancelo admits he didn’t expect City to be in such a dominant position in the Premier League heading into Sunday’s game at the Etihad.
Our run of 15-consecutive Premier League wins has seen us move into a commanding position at the top of the table, 14 points ahead of second-placed United, having been as low as 11th at the end of November.
Indeed, it’s now 28 matches unbeaten in all competitions, which equals the Club record set under Pep Guardiola in 2017.
It’s been a remarkable sequence of results for City, with our ruthless mix of hard work out of possession and brilliance with the ball too hot for our rivals to handle.
Cancelo says our dominance is the result of collective hard work across our first-team setup, which has resulted in a squad of platers unified in their desire to be successful.
“Honestly, I did not expect to arrive at the derby with the gap we have, but I believe it is from our hard work,” he said.
“All the credit to our players, staff, everyone who analyses the videos, the chefs who prepare our meals - everyone had a contribution towards our consecutive wins and our good form.
“The way we train, it is not a surprise. Anyone who sees our daily training sessions can see that this is normal.
"We are a very unified group of players, dedicated and always ready to help each other.
“This year we are showing what a great team we are, and we want to continue this way, is important for the competitions we are playing, to fight for each one of them.
One of the most impressive aspects of our recent form has been the desire to win the ball back quickly when we lose possession.
City have scored 670 goals in 273 games under Pep Guardiola and we are very often defined by our remarkable goalscoring prowess.
But increasingly, our hard work off the ball is being recognised by people across the game.
Cancelo says our diligence out of possession is our secret weapon - and believes against teams like United, who are superb on the counter, it becomes an even more important aspect.
“The moment we lose the ball, we react very fast,” he said.
“Sometimes when I watch our videos, I can see the moment one of us loses possession, within seconds we have lots of players behind the ball.
“I believe that is the secret for a team’s success. We are a very integrated team and that has been visible on the pitch.
“United is a team that likes to counterattack. They have very talented and fast players upfront and it is vital that we stop their attacks, which is their strength.
“By doing that, we know we are closer to winning this game. In fact, not only this game but against every team.
“I believe this is the route we must follow, that we can continue this approach and we can bring a lot of success to our home this season.”