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City have won six of the last eight derbies, dating back to 2011's 6-1 win.
Van Gaal feels the Blues' status as Premier League leaders means they should be regarded as favourites to extend their run of derby success.
He said: "They are first. We are third. There's a goal difference. A points difference. They are the favourite."
Van Gaal's comments echo those of his predecessor David Moyes ahead of a game at Old Trafford against another of United's biggest rivals, Liverpool, in his solitary season in charge.
Moyes' attitude was perceived as negative given his side were the reigning champions and after the match, won 3-0 by the visitors, Liverpool manager Brendan Rodgers revealed he would never consider his side as underdogs for a game at Anfield.
Unlike Moyes though, Van Gaal has beaten United's 'top four' rivals, including City in last season's corresponding fixture.
The former Ajax, Barcelona and Bayern Munich manager is well aware of the importance of this weekend's game to the club's supporters.
But despite the intense local rivalry Van Gaal insists he will remain dispassionate towards the game in order to give his side the best chance of a second successive derby victory at Old Trafford.
"For the fans, it is very emotional," said the former Holland manager.
"I live in a little village. There it is the talk of the town. In Manchester it is even more so.
"But I have to work rationally and not emotionally."
Manchester United manager Louis van Gaal says Manchester City are the favourites for Sunday's derby, despite the match taking place at Old Trafford.