City won the last season's competition -- their first European Cup title -- as part of a historic treble, beating Inter Milan 1-0 in the final after eliminating holders Madrid 5-1 on aggregate in the semifinals.
Madrid, who have won the competition a record 14 times including five times in the last decade, kick off their 2023-24 campaign hosting Group C opponents Union Berlin at the Bernabeu on Wednesday.
"I think City are favourites," Ancelotti told a news conference on Tuesday. "They have a squad which allowed them to win it last year, which hasn't changed much. There are always surprises, above all in the latter stages, but right now City could be considered favourites."
"Obviously [our target is] to get through the group stage, to go through the quarters, and to compete until the end," Ancelotti said. "Making the last four, we can say that without too much pressure, that's a target we can reach."
"I see us as a team that will compete," he added. "We've never thought of ourselves as favourites and I don't think City will either as of today."
"We prefer to rest him to avoid problems," Ancelotti said. "He'll undergo tests tomorrow. He feels quite OK so we think it isn't serious, he could be back soon."