so on the second encounter with her i get the prompt to have sex with her, and at the end i always get "close, but not too close".

my question is, how can you change that and advance the relationship with the dullahan?

Affection increases if you play the scene right to agree to be the Dullahan's girlfriend and approach cordially (not stealthily) and sexually.

i do agree to become her girlfriend, but how do you approach sexually? i just press the block and the interaction starts, and i dont fight her or anything and choose the fuck option