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Source -With May’s Government Teetering, Trump Gives It a Shove

President Trump put his brand of confrontational and disruptive diplomacy on full display Thursday, unsettling NATO allies with a blustering performance in Brussels and then, in a remarkable breach of protocol, publicly undercutting Prime Minister Theresa May of Britain in an interview published hours after landing in her country.

I looked it up out 2 means:

  1. to sell goods or a service at a lower price than another company

  2. to make something weaker or less effective

I think here "undercut" is an extended meaning.

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Your meaning (2) is the correct one. To undercut can literally mean to cut the support from under something, e.g. by digging, and figuratively to say or do something that will tend to weaken someone, or make their fall or collapse more likely. A similar expression meaning the same thing is "cut the ground from under someone's feet". Trump, by saying what he did, is trying to weaken Mrs May.

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