We had received the following update on a Microsoft ticket 2511060010001250 regarding cancelling appointments from Outlook.

As per the update, 

There is a public documentation available to understand how Exchange appointment cancellation are handled -

Synchronization logic for appointments, contacts, and tasks - Power Platform | Microsoft Learn

the appointment activity will get deleted in dynamics unless -

The state is Completed or Canceled.

The appointment is in the past.

The user syncing the appointment isn't the appointment organizer.

If you don't want the dynamics appointment to get deleted then you need to explicitly set them in canceled state before the corresponding Exchange appointment is canceled. 

In this case, we need the appointment to be moved to Cancelled state. We do not want it to be deleted.

This is needed so that the user is aware that an appointment was cancelled