Niko Kovac was sacked last Sunday as Bayern coach after a 5-1 drubbing at Eintracht Frankfurt, with Hansi Flick taking over as interim boss for two games.
The former Germany assistant coach oversaw a 2-0 midweek win over Olympiakos which sealed a Champions League last-16 place with two matches to spare.
But Bayern sit fourth in the Bundesliga, one point behind second-placed Dortmund and four adrift of leaders Borussia Moenchengladbach.
Dortmund beat Bayern 2-0 at Signal Iduna Park in the German Super Cup in August, but Dortmund have unfinished business in Munich after suffering a 5-0 thrashing in April before their rivals went on to pip them to the title by two points.
"In the last five years, it has been hard to win there," said Favre. "But, we have nothing to lose. We respect Bayern -- we don't fear them."
Bayern have lost two of their last four league games and laboured against Olympiakos until Robert Lewandowski continued his incredible run of having scored in every Bundesliga and Champions League match this season, before Ivan Perisic netted late on.
Their 18 points from the opening ten matches is Bayern's lowest tally since the 2010/2011 season -- when Dortmund finished as champions.
Favre's men mounted a stunning fightback from two goals down to beat Inter Milan 3-2 on Tuesday in the Champions League and claim a third straight win.
Bayern have won six and lost four of the last 10 meetings against Dortmund, whose sporting director Michael Zorc says he wants them to "play like blokes" after being repeatedly muscled off the ball in April.
Bayern have off-field distractions in their hunt for a new head coach, having turned down former Arsenal manager Arsene Wenger.
But Zorc warned Dortmund against expecting the Bavarian giants to be off their game.
"We shouldn't think that anything will be given away or that we'll have it easy," he said.
Flick said: "We're playing at home and it's a chance to lay down a new marker."
Thomas Mueller sees the showdown as the "most important game of the year".
A second consecutive defeat would leave Bayern seven points adrift if Gladbach beat Werder Bremen on Sunday.
With Niklas Suele and Lucas Hernandez injured and Jerome Boateng suspended, Flick could field a makeshift back four of Javi Martinez, normally a midfielder, and regular left-back David Alaba at the heart of the defence, with winger Alphonso Davies and Benjamin Pavard as full-backs.
Dortmund hope England winger Jadon Sancho, who suffered a thigh injury against Inter, and captain Marco Reus, who has an ankle knock, will be fit.
One to watch: Marcus Thuram
With five goals and three assists in six league games, French forward Marcus Thuram has helped Moenchengladbach to the top of the Bundesliga.
Gladbach host Werder Bremen on Sunday with Thuram looking to score for a fifth straight match after netting an injury-tme winner in the Europa League against Roma on Thursday.
The 22-year-old Thuram, whose father Lilian helped France win the 1998 World Cup, is a big fan of Japanese Manga comics.
"(If I could be a hero from the comics), then I could take on a different form during a game, but I don't have the right spell," he joked.
10 - The number of goals Reus has scored against Bayern in his career.
11 - If Lewandowski hits the net Saturday, the Bayern striker will have scored in each of the first 11 games this season, extending his own Bundesliga record.
75,000 - The sell-out crowd expected at the Allianz Arena.
Fixtures (all times 1430 GMT unless stated)
Cologne v Hoffenheim (1930)
Hertha Berlin v RB Leipzig, Mainz v Union Berlin, Schalke 04 v Fortuna Duesseldorf, Paderborn v Augsburg, Bayern Munich v Borussia Dortmund (1730)
Borussia Moenchengladbach v Werder Bremen (1230), VfL Wolfsburg v Bayer Leverkusen, Freiburg v Eintracht Frankfurt (1700)