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, AFP reported.
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 sits fourth in the Bundesliga, one point behind second-placed Dortmund and four adrift of leader Borussia Moenchengladbach.
Dortmund beat Bayern 2-0 at Signal Iduna Park in the German Super Cup in August, but Dortmund has unfinished business in Munich after suffering a 5-0 thrashing in April before its rival went on to pip it 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 has lost two of its last four league games and labored 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.
The 18 points from the opening ten matches is Bayern's lowest tally since the 2010/2011 season – when Dortmund finished as the champion.
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 has won six and lost four of the last 10 meetings against Dortmund, whose sporting director Michael Zorc said he wants it to "play like blokes" after being repeatedly muscled off the ball in April.
Bayern has off-field distractions in its hunt for a new head coach, having turned down former Arsenal manager Arsene Wenger.
But Zorc warned Dortmund against expecting the Bavarian giant to be off its 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 beats 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 defense, with winger Alphonso Davies and Benjamin Pavard as fullbacks.
Dortmund hopes England winger Jadon Sancho, who suffered a thigh injury against Inter, and captain Marco Reus, who has an ankle knock, will be fit.