Mercedes has taken the Hydra head to offer as tribute to the Duke. Head for the Mountain Waycastle and help her escort it.

Off With Its Head
Regroup with Ser Mercedes

You should also receive the following trophy/achievement:

Getting a Head
Earned the Approval of the Enlistment Corps

You should speak to Ecbal, in Command Headquarters, before leaving. He has the following options:

Rest for a certain amount of gold - To pass time, for example from night to day, and restore your health. You can restore health and stamina and advance the passage of time at any inn or resting spot.
Manage stored items - You can deposit, withdraw or combine
Learn or set skills - You can learn skills, or set skills (costs gold)

But before proceeding in the main story, you can take care of some side quests from Cassardis:

Floral Delivery
Deliver Flowers to Benita

This quest starts in Cassardis, the village in which you started. Locate Benita who is attending to the wounded. Talk to her, to receive this quest.

Objective
The dragon's visit left injury and sorrow in its wake. Gather medicinal flowers so that Benita might treat the wyrm's victims

Details
Deliver Flowers to Benita - Benita requires sunbright and moonglow for her poultice. First gather some sunbright and bring it to her.

Note the following:
Sunbright can only be found during the day
Moonglow can only be found at night

Sunbright can be located in the wilderness outside town. Search for flowers near the base of trees. Gather five of those, then interact with Benita to hand them over. She then asks you to gather Moonglow. Head towards the beach, at night, to hunt for this flower. Be careful of wolves and other enemies that attack at night. Once you have found the moonglow flower, return to Benita and hand it over to complete the quest and receive your reward.