* C$ coming off 1.6 percent rally in previous session
* Weak domestic data overshadowed by U.S. housing report
* Bond prices get boost after soft economic data
By Frank Pingue
TORONTO, Dec 16 (Reuters) - The Canadian dollar was little changed against the U.S. dollar on Tuesday as traders avoided making any big commitments until after a widely expected Federal Reserve interest-rate cut due later in the session.
Domestic bond prices were slightly higher given weak U.S. housing data and a Canadian report that showed factory sales dropped in October.
At 9:40 a.m. (1440 GMT), the Canadian unit was at C$1.2315 to the U.S. dollar, or 81.20 U.S. cents, up from C$1.2317 to the U.S. dollar, or 81.19 U.S. cents, at Monday's close.
The Canadian dollar rallied 1.6 percent during the previous session in a move credited more to a sliding greenback ahead of an expected rate cut rather than any domestic fundamentals. It was unable to build on the momentum.
That is because traders stuck near the sidelines until the Fed's rate decision and to hear its thinking on policy at around 2:15 p.m. (1915 GMT). The Fed is expected to lower rates by at least half a percentage point to 0.5 percent.
"I think yesterday we had some action but now ahead of the Fed the market is unwilling to take any significant directional bid on the Canadian dollar," said Matthew Strauss, senior currency strategist at RBC Capital Markets.
"So we're looking at rangebound trading ahead of the Fed with, if anything, a slight strengthening bias against a generally weakening U.S. dollar."
The main piece of Canadian data for the day showed factory sales fell 0.5 percent in October from September, in line with expectations, on weaker prices for coal and petroleum products.
But the data did not weigh on the domestic currency as it came out at the same time as U.S. data that showed new housing starts and permits plunged to record lows in November. That data kept the greenback pinned lower.
The Canadian dollar also drew some support from higher oil prices, which rose on expectations that the Organization of the Petroleum Exporting Countries would agree to its biggest supply cut ever when the group meets in Algeria this week.
BONDS PUSH HIGHER
Canadian bond prices rose after the weak data from both Canada and the United States, which was enough to convince dealers to seek the security of government debt.
The weak data followed a soft U.S. report from Monday that showed manufacturing took another hit, while price declines provided a reminder that deflation may be on the horizon.
With the looming Fed rate cut due later in the session, bond prices were likely to remain higher.
Canada's economic calendar will pick up as the week goes on with the key reports being October retail sales figures due Thursday, and Friday's consumer prices report for November, which is expected to show another drop in prices.
The two-year bond was up 1 Canadian cent at C$102.48 to yield 1.457 percent. The 10-year rallied 30 Canadian cents to C$109.95 to yield 3.031 percent.
The yield spread between the two-year and 10-year bond was at 160 basis points, up from 161 basis points at the previous close.
The 30-year bond was up 35 Canadian cents at C$122.15 to yield 3.730 percent. In the United States, the 30-year Treasury yielded 2.945 percent. (Editing by Frank McGurty)